WaterTAP, Ontario's Water Sector Accelerator Since 2012,
Will Cease Operations June 30th.

Read the press release

Securing Access to Capital: Peter McArthur’s Advice for Early-Stage Companies

For Peter McArthur, water advocacy extends well beyond his fondness for white water paddling on Québec’s Dumoine River. As Senior Account Manager, Knowledge Based Industries, ICT, and Cleantech for Royal Bank of Canada (RBC), he manages the banking for over 30 different cleantech companies in the GTA and assists other RBC partners with cleantech companies across Canada, including firms from the water space such as Real Tech Inc. and XPV Water Partners.

From McArthur’s experience, access to capital is an ongoing challenge for cleantech entrepreneurs. The water sector is especially notorious for having a long sales cycle.  

“The municipal or governmental sector is very risk averse, so it can be difficult to disrupt proven and entrenched technologies,” he says. “As a result, the initial excitement that welcomes a new technology isn’t enough without subsequent adoption.”

The irony is that proven cash flow positive results are often necessary to receive financing. Yet, the tough reality is that most companies cannot reach dot positive without first having access to capital.

Credit through angel affiliation

Still, McArthur remains optimistic that the cleantech innovative cluster can succeed. One of the ways in which he has been able to provide financing for early-stage companies is through the National Angel Capital Organization (NACO), which accounts for the majority of angel investors in Canada.

“If angel investors have invested in the company during the last two years, then we can provide a credit card for them for 10% of the amount that’s been invested, up to a maximum of $50,000,” he says.

To put that figure into perspective, if a NACO member invests $250,000 into the company, a company could be eligible for a $25,000 credit card, of which, the only security requirement could be a general security agreement for the assets of the business. According to McArthur, this is a huge improvement over the typical cash secured or personally guaranteed $2,000 credit card.

“For an emerging company, access to this much of a credit card limit can be absolutely transformative,” McArthur says. “All of a sudden, companies can afford to go to WEFTEC, purchase lab equipment, or invest in market intelligence and tools such as Google AdWords to better target their customer base.”

Contract Financing

Early-stage companies will typically have an easier time getting access to capital for enhancements or upgrades, which are less of a risk than brand new technologies. One of McArthur’s clients in this former category was able to win contracts with three very recognizable customers.

“At the one year mark, we were able to put a credit facility in place for them, which is absolutely unheard of, but we had contracts in hand from three known purchasers,” he says. “They had already tested the product, accepted demonstration units, and projected a positive cash flow in the following year from fulfilling those contracts.”

“This contract finance model is not a common solution, but clear sightlines on incoming revenue gave the bank confidence in this case,” McArthur says. “We provided an early stage contract finance facility for the company, which allowed them to fulfill the three contracts.”

Performance Security

On occasion, McArthur has met companies whose end customers have vouched for the company’s ability to deliver. In such cases, a standby letter of credit can alleviate any concerns about putting down a meaningful deposit before an order is fulfilled.

“In one case, a client with a very high gross margin and a unique product was able to negotiate a 50% deposit up front for a sale,” McArthur says. “However, the purchaser wanted a letter of credit back from the company to ensure completion of the contract.”

“Rather than having to use the deposit as security to support the guarantee back to the purchaser, Export Development Canada backstopped the facility,” he says. “This freed up the deposit for the company to use in order to fulfill the agreement, and, in essence, became a self-financed contract.”

Tip 1: The art of ‘speaking bank’

The foremost advice McArthur gives to early stage companies concerns the importance of ‘speaking bank.’

“So often, companies will be over-scientific about their technology, or too idealistic about their sales potential,” he says. “If you can’t speak to the banker in concrete financial terms about the implication of your working capital, the leverage of your business, or the cash flow that is being generated by a contract or your business in its entirety, then we won’t be able to help you.”

Related to this issue is the quality of financial documents. “Many companies say that they are too small and can’t afford a CFO, doing it themselves,” McArthur says. “However, the minute that those numbers do not appear to have integrity, the minute that any probing doesn’t support what’s being presented, the bank will lose confidence in your projected forecast.”

McArthur recommends having a part-time CFO. “I’ve had early stage companies hire an accountant and produce a sophisticated forecast that allowed me to believe they were going to be cash flow positive in one year,” he says.

Tip 2: Build Trust

“My job is to represent my customers to the bank and to get access to the bank’s capital for those companies,” McArthur says. “I have to stick my neck out every single time that I do a deal, so I only do so for people I believe and trust.”

“Trust comes in a variety of ways, but I am especially persuaded by people who will clearly convey not only their competitive advantages, but their real weaknesses, too,” he says. “I love it when a potential client gives me a copy of their internal deck that outlines their action plans and strategies to overcome actual challenges and real competitors, including a detailed SWOT (strengths, weaknesses, opportunities, and threats) analysis.”

“Not everything goes according to plan with a business,” McArthur says. “When things do veer off course, then the right thing to do is not try to hide it from your banker, but rather keep them in the loop, and let them know how you’re adjusting your plans accordingly.”

Tip 3: Deal with the right banker

In his closing advice, McArthur cautions against accepting just any banker.

“Find someone that you connect with personally and are likely to build rapport with and trust,” he says. “You want someone who will take the time to exchange ideas, who can dedicate bandwidth to not just about financing, but also about foreign exchange, trade services, employee retention, among other important matters.”

“If you’re ushered out too quickly, you’re probably not getting the value you deserve,” McArthur says. “You’re generally going to get a better experience with a strong small business banker or commercial banker.”

According to Jodi Glover, CEO of Real Tech, McArthur just happens to be one of those high-value bankers. “Peter’s passion for the cleantech industry really shows in the way that he makes client success a shared mission,” she says. “Many entrepreneurs forget that having strong external partners who can become trusted advisors are just as vital to a company’s success as your internal team.”

Josh Chong is the Communications Manager at WaterTAP.